Customs Duty not leviable on lmport of capital good: Karnataka HC [Read Order]

In a recent case, the Karnataka High Court has held that customs duty on capital goods is not leviable due to the failure to achieve the NFEP, the levy of a consequential penalty cannot be sustained.

The revenue challenged the order passed by the CESTAT on various grounds. The respondent, Such Silk International Ltd. was permitted by the Department of Industrial Development to set up a 100% Export Oriented Unit (EOU) and is registered under the Central Excise Act, 1944, and the Customs Act, 1962.

The respondent imported duty-free capital goods and raw materials/consumables by availing exemptions under the erstwhile Notification No. 53/1997-Customs dated 03.06.1997 (now Notification No. 52/2003-Customs dated 31.03.2003).

The respondent also procured duty-free capital goods and raw materials/consumables indigenously by availing the benefits of the Notifications. For the period from 05.06.2000 to 20.03.2003, the respondent-assessee imported capital goods and raw materials/consumables, availing exemption from payment of customs duty under Notification No. 53/1997 dated 03.06.1997.

The Notification contemplates that the imported raw materials and consumables should be utilized in the production of the final products. It is the case of the Revenue that, although the assessee commenced commercial production in March 2001 and initially exported the goods, the unit subsequently became defunct and failed to fulfill the required export obligations, violating the specified conditions.

The Revenue held that the assessee contravened the provisions of the Notification by not utilizing the imported duty-free goods and the capital goods and consumables procured in accordance with the approvals granted.

Proceedings were initiated under Sections 28 and 72 of the Customs Act, 1962, to recover duty on the imported capital goods and raw materials/consumables. Accordingly, a Show-Cause Notice was issued.

In response, the respondent-assessee contended that commercial production had commenced and exports were made, but the export obligation could not be fulfilled due to the sudden cancellation of orders and withdrawal of their foreign partner by US importers.

It was further contended that, in respect of capital goods, the obligation merely required the installation of such goods in the manufacturing facility for export purposes, and any failure to meet the export obligation would not entail the levy of duty on the capital goods.

These contentions were rejected, and by order dated 06.02.2012, duty was levied along with a penalty of Rs.50 lakhs under Section 112(a) of the Customs Act, 1962, in respect of the capital goods. Further duties and penalties were also levied with regard to capital goods and raw materials under other provisions of the Act.

The assessee accepted the order imposing duty on unutilized raw materials and consumables and paid the duty along with the penalty. However, the respondent–assessee disputed the levy on the import of capital goods by filing an appeal before the Tribunal. The Tribunal held that once the capital goods are installed and used for the manufacture of goods for export duty is not leviable for failure to achieve the export obligation. The said order is under challenge and is impugned in CSTA No. 8/2018.

The Tribunal, in the impugned order, held that duty is not leviable in respect of capital goods. However, no specific order was passed regarding the penalty under Section 112(a) of the Customs Act, 1962. Consequently, a miscellaneous petition was filed before the Tribunal, which was rejected.

Sri Jeevan J. Neeralgi, Senior Standing Counsel, appearing for the appellant–Revenue, submitted that the petitioner availed duty-free import of capital goods with an export obligation. The unit was registered as a 100% Export Oriented Unit (EOU) and has ceased production and manufacturing activities, thereby failing to fulfill the export obligation in terms of Notification No. 53/1997 dated 03.06.1997.

It is submitted that goods imported with an export obligation, but in respect of which the export obligation is not fulfilled, would attract the levy of duty. Senior Standing Counsel further submits that Notification dated 31.03.2003 was issued, imposing the levy of duty on the import of capital goods, and that the same is clarificatory in nature and applies retrospectively.

On the other hand, Sri Ravi Raghavan and Sri K.M. Nischal, counsels appearing for the respondent– assessee, submitted that the issue is covered by the earlier order of the Tribunal in Hindustan Agrigenetics Limited, which has attained finality. Counsels further submit that Notification dated 31.03.2003 has no retrospective application, as the period involved is from July 2000 to October 2002. Insofar as the penalty is concerned, it is submitted that once duty is not leviable, the levy of a consequential penalty cannot be sustained.

The respondent–assessee, being a 100% EOU, imported capital goods and raw materials/consumables for the purpose of export under the scheme, without payment of customs duty. It is not in dispute that the respondent–assessee did not fulfill its export obligation as per the conditions of the scheme. The respondent–assessee contends that the obligation could not be met due to sudden changes in the market conditions of the importing country.

The only question that requires consideration by this Court is the levy of duty and penalty insofar as the import of capital goods is concerned. General Exemption No. 42, as available in the Customs Tariff of India 2002–2003, operative as on 10.08.2002, has been placed before us. According to General Exemption No. 42, the requirement in respect of imported capital goods is their installation or use within the bonded premises within a period of one year from the date of importation. In the case of raw materials, non-fulfillment of the export obligation, measured in terms of Net Foreign Exchange Earnings as a Percentage of Exports (NFEP), results in the levy of duty.

The Tribunal, in its referred order, has categorically held that the duty forgone on capital goods is excluded from the levy of duty, as the condition for exemption in respect of capital goods is limited only to their installation and use within the unit for the manufacture of goods for export.

It is held that when the procurement and installation of capital goods is not in dispute, the demand for duty on such capital goods cannot be sustained merely because the unit failed to achieve the NFEP. The Tribunal, following its earlier order, held that duty on capital goods is not leviable when such goods are installed and used primarily for the manufacture of goods for export, even in the event of non-compliance with the NFEP.

Justice S.G.Pandit and Justice K. V. Aravind viewed that General Exemption No. 42 clearly provides that when raw materials or consumables are imported duty-free and the unit fails to achieve the NFEP within one year of importation or procurement, the authority is entitled to levy duty. No such provision exists for the levy of duty on capital goods imported in the event of failure to achieve the NFEP. In the absence of an enabling provision, the levy of duty on capital goods is impermissible. The Revenue contends that the levy of duty on capital goods due to failure to achieve the NFEP is enabled by Notification dated 31.03.2003.

However, the said Notification cannot be applied retrospectively, as the period of default involved is from July 2000 to October 2002. The Revenue has not demonstrated any retrospective application of the Notification. In the absence of such retrospective effect, the Notification cannot be applied to the present case.

The bench set aside the penalty under Section 112(a) of the Customs Act, 1962 and held that customs duty on capital goods is not leviable due to the failure to achieve the NFEP, the consequential penalty is also not sustainable.

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